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FROM THE PBA FAMILY LAW SECTION QUARTERLY

Child Support Calculations: Murphy v. McDermott

Joanna K. Conmy, Esq.

Overview:

In its July 31, 2009 decision, the Superior Court (per Lally-Green, Freedberg and Fitzgerald, JJ.) affirmed in part, vacated in part and remanded Luzerne County Judge Augello’s support order for the parties’ minor child. The Court upheld the lower court’s decision to include a contribution toward private school tuition payments in the support order. The Court found that the lower court erred when it included one-time stock option payments in Father’s income, failed to correctly calculate Father’s car perquisite income, and failed to account for withdrawal penalties for Father’s 401(k) in its support calculations. The Superior Court vacated the trial court’s order and remanded the case for further proceedings and recalculation of Father’s net monthly income available for support.

Factual and Procedural History:

Colleen Murphy (Mother) and James McDermott (Father) are the parents of minor child, A.M., born on July 30, 2002. The parties never lived together and have never been married. Father acknowledged paternity two months after his son’s birth, and a month later, Mother commenced a support action, which resulted in a Luzerne County court’s July 13, 2004 support order directing Father to pay $1,535.84 per month in support (which included arrearages and partial unreimbursed medical expenses).

Mother enrolled the child in a private preschool program for the 2005-2006 school year. Although Father disagreed with the decision to send the child to private school, he voluntarily paid Mother $1,400.00 of the $1,980.00 cost for the school year. In May 2006, the trial court entered an interim support order directing Father to pay $1,500.00 per month, with $137.00 per month to be paid for private school tuition. Mother enrolled the child in the same preschool program for the 2006-2007 school year. Father again did not agree with the decision, but, unlike the prior year, he did not voluntarily contribute.

For the 2007-2008 school year, Mother planned to enroll the child in kindergarten at a new private school, which was a consolidation of several schools in the area, including the child’s preschool. At the Master’s hearing, Mother testified that that private school was in the child’s best interest because her child has been with the same children for two years, and academically she thought the school had a great program. Father testified that public schools offer more and had programs to meet the child’s needs. He testified that his objection to his child attending private school was “philosophical” rather than financial, although later on appeal he claimed the lower court mischaracterized that objection.

On July 30, 2007, the Master recommended that Father pay $1,896.74 per month in child support, including $231.56 per month toward private school tuition. The Master reasoned that Father could easily and adequately afford to pay for the contribution, and that in light of Father’s station in life and assets, it would be in the child’s best interest to continue his private school education. The Master also calculated Father’s income and determined his 2007 net monthly income to be $10,973.66. In that calculation, the Master included 401(k) and stock contributions by Father’s employer, perquisite income equivalent to 40% of the total cost for a company car, and two vested stock options which Father exercised. The Master recommended that Father pay child support of $1,896.74 per month starting August 1, 2007.

Father filed Exceptions. Luzerne County Judge Augello both denied Father’s Exceptions and adopted the Master’s report on October 24, 2007. Father appealed the court’s decision which included a monthly contribution toward private school tuition in the monthly support payment and the court’s calculation of his net monthly income available for support.

Father presented specifically the following issues on appeal: 1. whether there was evidence of a benefit to the minor child sufficient to find an award of private school tuition to be proper; 2. whether the evidence established that private school is consistent with the parties’ standard of living and station in life prior to separation;  3. whether an appropriate reduction of income should have been calculated for the year following exercise of stock options by Father; 4. whether the evidence regarding Father’s personal use of his company car justified a change in the percentage assessed for “perk” income and whether the amounts deducted from his pay for personal use should be deducted specifically from the percentage of use deemed to be personal; and 5. whether amounts included in Father’s income calculation representing matching contributions by his employer to his 401(k) and stock accounts were subject to reduction for appropriate taxes and withdrawal penalties regardless of whether Father had actually accessed the funds.

Legal Analysis:

Private School:

The Superior Court per Judge Lally-Green first addressed both of Father’s private school issues together. Pursuant to Pa.R.C.P. 1910.16-6(d), the court may direct the obligor to contribute to private school tuition if it is a “reasonable need.” In determining whether a need is reasonable, this Court has stated that a private school education may be a reasonable need for a child if it is demonstrated that 1. the “child will benefit” from such; and 2. if private schooling is “consistent with the family’s standard of living and station in life prior to separation.” Gibbons v. Kugle, 908 A.2d 916 (Pa. Super. 2006). The court held that it would uphold the trial court’s decision to order private school tuition contributions so long as the court did not abuse its discretion. 

The court held that, despite a limited record on these issues, the lower court did not abuse its discretion in its determination to include a contribution toward private school tuition payments in the support order. For the first part of the analysis, the court found no reason in the record to justify a conclusion that the child would not “benefit” from his arrangement. It found that, at the new private school kindergarten program, the child would “presumably rejoin some of his classmates from pre-K”, and “enjoy a similar academic philosophy.”

For the second part of the analysis, the court held that the record supported a finding that the child’s attendance at private school is consistent with the child and parents’ station in life. The court opined that the child has only known private school. It noted the fact that Father was already under an interim court order directing him to contribute to private school tuition, and the new order would only increase that amount “by slightly over $100.00 per month.” It emphasized that the record reflects that Father’s payment for private school “poses little, if any, financial burden on Father.” (Also of note: the court found that the “prior to separation” clause does not apply here since the parties were never married, and thus never separated; nevertheless it is still consistent with established case law that the court take into account the parties’ financial stations in life.) Consequently, the court found that Father’s claim lacked merit, the lower court did not abuse its discretion on either of the private school issues, and ultimately it upheld the lower court’s decision.

Next, Judge Lally-Green addressed the lower’s courts calculation of Father’s net monthly income and child support obligation. Father argued that the court made several miscalculations in determining his income and failed to properly reduce his 2008 income, which would directly affect his child support payment.

Income Miscalculations:

Father claimed the first arithmetic error by the lower court was the inclusion of two stock options exercised in 2007 and valued at $23,276.67 (the court did not include Father’s one unexercised stock option valued at $11,100.00). He argued that the 2007 stock options were one-time gains that the court should not have included in determining his 2008 income. The court agreed, and found that Father had “no potential” of earning income in 2008 from the two stock options he exercised in 2007.

The court must consider all forms of income when determining income available for child support, and stock options are a form of deferred income. MacKinley v. Messerschmidt, 814 A.2d 680 (Pa. Super. 2002). A parent who declines to exercise stock options is still imputed with the monetary gain from exercising those options because the support obligation is based on a parent’s earning capacity. Id. at 684. In the present case, however, the court found that the lower court erred because it figured the one-time stock option income, a singular payment, into a support order that was to run forward with no end date. This improperly created a future support obligation based on a one-time increase limited to 2007 only. The court concluded that there was insufficient evidence to sustain the support order to the extent it applies after January 1, 2008.

Father argued the lower court’s second miscalculation involved the amount deducted from his pay for the personal use of his company car as perquisite (also known as a “perq” or “perk”) income. Father stated that his employer pays $16,798.65 per year for his company-issued vehicle and deducts $1,820.00 per year from his paycheck for his use of the vehicle, for a total cost to the employer of $14,978.65. Father uses the vehicle 40% of the time for personal use. Father contends that the court erred by deducting 40% from the net amount of $14,978.65, arguing that the court should have deducted 40% from the gross amount of $16,798.65 and then subtracted the $1,820.00 from that sum. The Superior Court agreed, and found that the lower court improperly calculated Father’s perquisite income.

The court must thoroughly appraise a parent’s actual earnings and perquisites for purposes of calculating child support, and personal perquisites, such as vehicle expenses paid by an employer, must be included as income. Mascaro v. Mascaro, 803 A.2d 1186, 1194 (Pa. 2002). The court found that Father’s payment to his employer for personal use of the vehicle, specifically $1,820.00 per year, is an expense, not income. Father uses the car 40% of the time for personal use, and 40% of the gross amount of $16,798.65 is $6,719.46. Accordingly, Father’s payment of $1,820.00 should be deducted from $6,719.46 for a total perquisite earning of $4,899.56 ($16,798.65 x .40 = $6,719.46 – 1,820.00 - $4,899.46 perquisite income).  This amount should be imputed as income for support calculation purposes. Therefore, the Court concluded that the correct way to calculate the income of a “perk” was to find the gross amount the employer paid for the perk, deduct the percentage the perk was used for personal instead of business use, and credit the party with the amount directly paid to the employer for that personal use.

Father asserted the lower court’s third miscalculation was the imputation of the gross amount of his employer’s contribution to his 401(k) and stock accounts as income available for support. He argued that the calculation of his income should account for income taxes and withdrawal penalties attributable to his employer’s 401(k) and stock contributions. The court agreed that that penalties incurred for withdrawal should be deducted from the gross amount of an employer’s contribution to a 401(k) and stock accounts.

An employer’s contribution to an employee’s retirement plan could constitute income if the employee could access his employer’s contributions, for if an employee/parent is entitled to any portion of these funds at the time of support calculation, the children should presently reap the benefit of the investment. Portugal v. Portugal, 798 A.2d 246 (Pa. Super. 2002). If the trial court, on remand, determines that a parent has the present ability to access his employer’s 401(k) contributions, then those contributions, less the penalty incurred for withdrawal, shall constitute additional income for purpose of the child support calculation. Id. at 253. The Portugal court did not consider income taxes attributable to the withdrawal of the employer’s 401(k) and stock options as part of the income calculation. Id. Thus, the Superior Court concluded that the lower court abused its discretion by failing to deduct withdrawal penalties from the gross amount of Father’s employer’s contribution to 401(k) and stock accounts. The Superior Court accordingly remanded the case to the lower court for recalculation of Father’s net income and support obligation.

Dissenting Opinion:

Judge Fitzgerald dissented only on the issue of private school payment. He emphasized the fact that the record contained “scant” evidence to establish whether the child would benefit from private school. Namely, he finds only two lines in the record testimony relating to the issue, which is Mother’s statement: “Because he has been with these children for two years now, and I think academically they have a great program.” Judge Fitzgerald believed that Father raised the legitimate point that public schooling could be in the child’s best interest and cannot be considered presumptively deficient.

Judge Fitzgerald also stressed that the question should not be whether Father is financially able to pay for the private schooling; instead the issue should be whether Father should pay for reasonable private schooling. Judge Fitzgerald believed that Mother should be required to establish by a preponderance of the evidence that, given the child’s young age, public school is manifestly deficient as compared to private school and thus would not be in his best interest, particular when the child has not yet begun the education mandated by law, which is the first-grade level.

CASE NOTE AUTHOR’S EDITORIAL COMMENTS:

Murphy v. McDermott provides an effective review of current case law and illuminates several essential child support calculation issues. Notably, this case shows that a party seeking to keep a child in private school apparently has a minimal burden to prove that the child will benefit from it. Mother only had to offer her opinion that her son would benefit because he would be with his preschool classmates and she thought academically the school had a great program. She did not need to provide any actual evidence to support these assertions. Practitioners should be cautious, however, when relying on this case as each case is fact specific and other courts might, and likely would, require more evidence. On the other hand, the case also demonstrates that a party seeking to mitigate the burden of paying a private school tuition (especially if that party has been paying the tuition already) should offer as much evidence as possible to show that public school is not presumptively deficient.  Also, note that the child had been in private school since early childhood which apparently justifies private school tuition from K-12, the latter years bringing considerable tuition payments

The case is also relevant to prove that a private school contribution can be added to a support order even where the parties were never married. Although there was no family standard of living and station of life prior to separation because there was no separation, this court followed Gibbons and took into account the parties’ financial stations in life regardless of whether they were married.

Murphy helps to clarify various financial nuances when calculating a party’s income available for support. Practitioners can turn to this case to confirm that a one-time stock option income included in that year’s income is limited to that year only and cannot be imputed for future years. Interestingly enough, there was no Krebs argument here that Father should have notified Mother of the 2007 stock option income. Had there been a Krebs argument, Father may have been responsible for retroactive support for the year 2007. Practitioners can also look to this case to show that any personal contributions by an employee for a company “perk” should be credited to the employee. Finally, practitioners can reference this case to argue that any withdrawal penalties incurred by a party’s employer should be deducted from the employer’s contributions to a party’s 401(k) and stock accounts for the purposes of calculating a party’s exact net income.  The apparent non-inclusion of income taxes in the calculation of net income based on employer contributions to obligor’s 401(k) is perplexing at the least and not logical at the most.  Most trial courts real Portugal differently. 

Joanna K. Conmy is an associate in the Blue Bell Montgomery County Bar Association Family Law Section and the Pennsylvania Bar Association Family Law Section.